Quick! Do you have a variable rate mortgage? Has your lender given you the opportunity to lock in your next mortgage rate today since it’s up for renewal in the next 90-120 days?
If the answer to either question is yes, then I’m going to suggest that you seriously consider locking down a fixed-rate mortgage as soon as possible. Mortgage rates are going up. The higher the rate, the more interest you’ll pay to the bank. Why pay more if you don’t have to? If you have the opportunity to renew your mortgage at a low interest rate, then lock it down as soon as possible!
It’s fairly complex. I am certainly no expert but my understanding is this. The 5-year mortgage rates are going up because central banks are expected to raise the bond rates. They’re raising those rates in order to fight inflation. The bond market controls long-term interest rates. That’s the entirety of my understanding of how the whole thing works. You’re encouraged to learn more about this if you’re interested.
The long and the short of it is that the very low 5-year mortgage rates that we see today will soon be gone. Some people are predicting that mortgage rates will double in the next 18 months. You should play around with an amortization calculator. Doing so will give you a good idea of what your mortgage payment when mortgage rates are twice what they are now.
This is not a good time for procrastination. Lock it down! Call your lender and figure out how to secure a fixed interest rate while fixed rates are still very, very low.
Once you’ve locked into a fixed rate, consider making extra payments towards your mortgage. When your mortgage renews in 5 years, the rate is going to be higher. As we all know, higher mortgage rates mean higher mortgage payments. Throwing extra payments at your mortgage while paying a lower rate over the next five years will lessen the impact of renewing at a higher rate. If your budget won’t allow for extra payments, then start a sinking fund. Every time you have some extra cash, squirrel it away. When renewal time rolls around, you’ll have a chunk of cash to throw at the principal. Making lump sum payments is another way to minimize the increase in mortgage payments when you go to renew your mortgage in the future.
Of course, if your mortgage is scheduled to be paid off in the next 5 years, then you need not worry too, too much. You won’t be on the of ones renewing into a higher interest rate environment.
If you have a line of credit, pay it off! Your monthly payment on your LOC is made up of interest and principle. As the interest rates go up, the portion of your payment devoted to interest will also go up. The result is that it takes you longer to pay off the principle. In other words, you’re paying more interest on your line of credit as interest rates go up.
For the record, I’m a huge fan of 5 year rates, so my suggestion in this article applies to the 5-year fixed rate. I only ever had 5 year amortizations when I had a mortgage. To me, it was easy enough to plan life in 5 year increments. Some people like the idea of having a 10 year fixed rate. Others want to lock in a rate for 3 years. You’ll have to pick the timeframe that best suits your life and your goals.